What are the different types of cash flow problems?

Unexpected business expenses can come from a variety of areas or functions.

Cash flow problems can be quite distressing for business owners and managers, especially when bills go unpaid. Common cash flow issues include the inability to collect unpaid accounts receivable, too much inventory and low sales, high unexpected business expenses, and overpaying employees. While many other problems can exist in a business, they are among the problems that can occur in any business that will create negative cash flows.

Companies that hire too many workers or overpay for work functions will have cash flow problems.

Accounts receivable allows customers to purchase goods now and pay outstanding balances later. Companies can vary their accounts receivable methods, requiring an upfront payment on goods or services with the balance due to be paid within 30 days, or offering a small discount to customers who pay in advance. Cash flow problems begin when the company offers credit to bad customers who are unable to pay their accounts receivable balance. The longer customers lag behind – such as 60 or 90 days of outstanding balances – the less likely the company is to receive the money.

Inventory is often the second biggest expense for companies. Most companies buy stock items to stock on shelves in hopes of selling the items to customers. Unsold stock is capital loss. Even though the company can use accounts payable (credit purchases) to buy inventory, it will have to pay suppliers and sellers for the goods. This creates cash flow problems as the company must pay for inventory without generating cash from sales.

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Unexpected business expenses can come from a variety of areas or functions. For example, a vehicle can break down, resulting in large unplanned expenses for the business. If the company spends all of its capital reserves on this repair, any other unexpected expenses can create cash flow problems for the company. Small businesses often face this problem as they have lower cash reserves than other businesses. In addition, the company may need to take out a line of credit to fund these unexpected expenses. This increases interest payments for line of credit sweepstakes, resulting in more cash flow problems.

Employees are the number one expense for most companies. Companies that hire too many workers or overpay for work functions will have cash flow problems. Business owners and managers may think they have to pay higher wages to bring highly skilled workers into the business. If these workers do not live up to expectations for increased revenue or increased production time, etc., however, the company is overpaying for the work completed. This will result in higher expenses and fewer products to sell to recoup the expenses.

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